Zero-based budgets for the home: a primer

Budgets have a bad rap because they’re seen as shackles. Instead of getting to do fun things with money, budgets make you do boring things, like pay the gas bill, and not go out to eat.

Not necessarily. Whether you realize it, you do have a budget. Your budget might reveal that morning lattes are worth 13% of your income to you, but it’s still a budget.

Living on a budget simply means telling your money where to go – it doesn’t handcuff you from spending it.

Ever feel like money somehow vanishes every month? We did too, until we started regular budgeting. More specifically, until we started planning monthly, zero-based budgets.

Zero-based budgeting is basically putting a name to every dollar that comes your way. It starts with your income side of the equation, and line by line, the total subtracts as you allot amounts to each category, until you are down to zero.

The goal is simply this:

income minus expenses equals zero

I’ll show you an overly basic example.

The McSimples bring home $3,000 a month. So that’s the number they start with.

INCOME: $3,000EXPENSES:

giving – $300

mortgage – $1,000

utilities – $500

groceries – $500

insurance – $200

gasoline – $firstborn

TOTAL EXPENSES: $3,000

$3,000 – $3,000 = $0

There’s no “miscellaneous” category. There’s no money set aside for “just in case,” because you’ve already planned where every cent is going. Even if it’s going to savings, it’s going somewhere.

The key to what the McSimples did was that they planned their month’s expenditures on what they were actually going to bring in that month. They didn’t budget what they thought was ideal for each category, and then hope that amount comes in that month. That’s not even budgeting, really – that’s just writing down on paper what they wish they could spend money on. I like how Amber once coined it in the comments section – “prediction-based budgeting.”

So the key difference to a zero-based budget is that you look first at the numbers on the income side of the equation, and then you make your expenses work within the boundaries of your income. It balances. Which means, you actually have the money you’re allotting.

So the next question to consider is – if you were to write a zero-based budget for your family every month, would you keep track of it? Do you just set the paper aside and hope for the best? Do you walk around with it in your purse, analyzing every single number until you’re cross-eyed walking around Target and scared to death of putting anything in your cart?

I encourage you – prepare a zero-based budget as part of your home management every month. And then regularly (such as weekly, like what I do), enter your expenses to stay on top of how well you’re sticking to your budget. As the month progresses, you can see how well – or not so well – it’s working, and tweak it from there. I promise you it doesn’t take much time when you stay on top of it.

This is also infinitely easier to do when you have a smart, simple tool that subtracts expenses from your budget as you record them. And since this is Simple Mom, after all, I prefer a tool that’s as light and easy-to-use as possible. No bells and whistles that I really don’t need for everyday family finance management. For me, Pear Budget is that tool – I absolutely love this gem of a budgeting program. Plus, I love that I’m supporting a family-run business (who also happen to be loyal SM readers!).

How about you – have you ever tried zero-based budgeting before? Or is there another system that works better for you? Do you think it would help seal in the cracks where loose change is slipping? Or would it make your head spin with details? I’m curious.

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Comments

We definitely do a zero based budgeting system. We are big fans of the envelope way and find that when we use cash only, and are on top of the #s coming in and going out, things run much more smoothly.

This article comes at a great time! Just this morning I was thinking about the fact that I haven’t budgeted my checkbook in at least a month. Something about ignorance being bliss. At least it’s bliss until I realize I have no funds. I will definitely have to give this a try!

I definitely think budgeting is a vital part of household management. Once I started doing this, I really became much more conscious of how I used my money and it seemed to save me some cash — probably because I now I had more accountability.

It has also helped me work toward goals, like paying off my husband’s student loan, that previously felt too overwhelming to really plan for. Now I feel in charge of my money, instead of the opposite way around.

I have a BIG problem trying to do this. Each month we get different amounts of money, since I’m a freelancer. Truth is, I know how much money I’ll be paid next month by the 28th, so I could budget. BUT! My boyfriend gets paid on the 9th of each month, one of my main clients pays me on the 14th and the other on the 25th. Our rent bill comes the 5th, my phone the 2nd and his the 19th. Electricity, every two months, the 12th. How would you deal with this?

This used to be my situation. We put everything directly into savings whenever it came in. Before the first of every month we transferred a set amount into checking and operated out of that. Even though our income fluctuated wildly from month to month, we did have a general idea of what a year would look like. So our set amount was our most conservative guess divided by 12. It really worked for us.

what you get paid (14th and 25th) will be applied to the first two weeks of the following month. all bills that are due between the 1st and the 15th would come out of your pay. your bf’s check on the 9th will cover all bills/expenses for the 16th through the end of the month. so your january paychecks would cover the first half of february and his february paycheck would cover the second half of february (this is based on the assumption that each of your checks is enough to cover this stuff ;).

make a spreadsheet (or just write down) what your pay will be and how exactly it will be divvied up across the first two weeks of the month. pay bills for those weeks as soon as they’re available. do the same with your bf’s check for the second two weeks. for bills that you pay every other month, go ahead and set aside half the amount due on the month you don’t pay, so that it’s sitting there waiting the month that you do.

Check out Dave Ramsey – he has the solution to this problem. Basically, you write out everything you would possibly spend money on that month, from house payment all the way to a cruise to the bahamas (in a dream world anyway). Then you prioritize it, like house payment first, utilities second, groceries third and on down the list to the least important thing. Then as the money comes in, you use the first money for #1. Then when it’s all paid, you move to #2 and so on. And you only make it as far on the list as your money goes that month. Hope that’s not too confusing but will help!

I made my own custom spreadsheet and graph system in Excel that has served us well. It forces me to type in each transaction and be accountable to my purchases, yet the program does all the calculating work for me–even outputting several graphs automatically that give me a quick visual cue to where we’re at. I’ve also added some pretty colors just to make the whole process that much more enjoyable. Added bonus: I’m so proud to have actually put that computer class I took in college to good use.

it’s scary to think of how many people I know that don’t keep track of what their money gets spent on. They all think I’m cheap because I don’t spend all my spare $$$ on useless things and dumb activities. I’d rather save it up to buy something or do something I really want that is worth the work!

So, in a zero-based budget, do you make a category for everything? Dining out? Entertainment? Clothes? Or is the goal to have larger categories that cover several areas? Would you include a savings categor?

It depends on what you’re trying to do with your budget, but, generally, you would create categories for everything. My wife and I have “dining out” as one category, and “groceries” as another category, but some people might combine those into one larger “food” category. Again, it kind of depends on what you want to track. In our case, we want to make sure that we stay within our budget for dining out, since it’s so easy for us to go over. I’d say we don’t have any categories (ourselves) where we spend less than $20 a month, if that helps? We tend to wrap those other expenses into other categories.

One thing to remember is that it’s just about impossible to start budgeting and to do it perfectly from the beginning. That is, you’ll want to jimmy some of your categories, or add new ones that you forgot, or get rid of ones that you don’t use, and so on. The important thing is to just start doing it (with whatever tool you’re most comfortable with).

Think of budgeting like smooching. The first time you smooched your husband, it probably wasn’t all “BEST.KISS.EVER.”, right? But you probably got better at it over time? Your budget’s like that. Just start (even if it’s a little sloppy), and work out the issues as you go along.

Finally, if you want some help with some “starter categories”, you can try PearBudget out (and make a fairly complete (if sloppy) first budget) for free. Even if you don’t use it after the free 30-day trial, you can take your list of categories with you and use it with whatever budgeting system you want. Let me know if I can help further!

I do a zero based budget. I love You Need a Budget (YNAB). It costs a few dollars up front to buy the software, but the upgrades are free, and it’s a great program. To make it work, you save like crazy to get one month ahead on expenses, and then budget each month on what came in the month before. You always have a month’s worth of expenditures in the bank so you can handle your bills. It works great even when income is irregular.

as a teacher who elects to not get a paycheck in the summer) budgeting is extremely important to me and the family! i just wish that we could find a REAL way to have “savings” be apart of that budget. and my giving section includes both church and school fundraisers that seem to constantly some up.

i wanted to note that i tried the pear budget site you have listed. it was great! i think we might sign up. thanks for the resources.

We are still working to remove the “entertainment” or “miscellaneous” from our budget category. We’ve been using Mint for budgeting and have found it very easy to use. So far we’ve knocked off over $200 from our grocery budget and I’m looking to save more with coupons.

I like this idea but I just can’t figure out how to make it work when I make a stop at a place like Target or Walmart, where I might be hitting multiple categories of my budget at once? Then I’m at home dividing out the receipt, figuring out how much sales tax goes to each category. ACK!

I’d be really grateful for some more input on how this works. Right now we simply track every dime, no categories. We do fine and we do not overspend, but I can’t help wondering if we could put more away by doing categories, but it has to be manageable, kwim?

i handle this by having one “grocery/household” category. if i also wind up buying clothing, i keep the receipt so that i can divvy up appropriately. i’ve never wound up with more than two categories from Target or Wal-mart this way (it’s either clothing, or it’s a food/household expense). but usually, i try to avoid shopping in more than one category at a time. i determine a need beforehand and go with a list in hand. this really helps limit impulse purchases.

I wrestled with this problem for years, and it was the single biggest budget breaker for me. I just couldn’t stay on top of a split-receipt system. I know this may not be kosher, but now I have a category called “Target”! I’ve found, though, that my budget holds best when I stay out of Target all together. I buy less of everything when I get household stuff at the grocery store, and clothes at the clothing store, and only go to Target when it’s an absolute necessity. That place just sucks money out of my wallet.

On my budgeting program (AceMoney) I can use a split funtion. Its fairly easy and it remembers which catigorys I use for which stores usally. The budgeting book I read said that its more important to know how much money is going than where its going. Your best guess is better than no guess at all. I find this to be true for the most part.

i do zero-based budgeting for our family, and finances have become so much less stressful since i started doing that. i use a spreadsheet for my allocated spending plan for each month (my husband is active duty, and our paycheck is always different). my mother wrote an amazing (and simple) program that renders virtual cash envelopes, so that i can use the dave ramsey cash envelope principles without actually carrying around envelopes of cash. i tried the cash system and found that it wasn’t really feasible…nor did i enjoy the couple of heart attacks i had when i misplaced it 😉

my mom’s one of your readers, and i’ve told her she should send you a copy when it’s ready for distribution (her dream is to be a stay-at-home grandmother, which would allow me to go back to school). i enter our paycheck into the program and divide it up into categories according to the allocated spending plan. then i enter what we spend as we spend it, subtracting it from the appropriate category. at any time, i can see what’s left in each category. this also makes it very easy to see where i might need to move things around, while also keeping a record of what’s been moved where (one of the disadvantages of the cash envelopes was that there was no record of it when we moved cash between categories).

I do an envelope type budget but I keep track of my envelopes in a simple spreadsheet. This is where I keep my checking account register too. We would have gone under a long time ago if we didn’t have a budget.

I don’t think there is anything wrong with a miscellaneous/fun category. It gives you a bit of cash for buying something not in the budget without the guilt. It could also be his/her fun categories so each one can buy stuff the other wouldn’t spend money on without arguments.

I began using a zero-based budget in December and I love it. It’s already enabled me to saving a relatively significant amount of money. Intermittently over months previous to that I had tried it but became overwhelmed by falling too far behind in tracking my actual expenditures. I started out with Pear Budget but purchased YNAB Pro in June. Since December I have stuck with it, entering my receipts on a daily or every other day basis. I love seeing the numbers accumulate in categories like Emergency Fund and Savings (yes, I have two separate categories currently) and in my House fund (for a bathroom reno and the last of the windows I need to replace). I find that because I’m not often on my bank website, the amount of cash “just sitting there” isn’t quite as apparent even though it shows for me in tabs across the top of the screen. Instead, I see the amounts left in each category and know how much I have left to spend instead of feeling “safe” in spending because I have $X in the bank.

budgeting is great ! My husband and I use Quicken. It can be complicated at first but after a while it’s very helpful especially since we do all online bill pay. The program retrives all of the info from our credit cards and places the purchases in our designated categories for us. We do zero budgeting … almost. One category in our month budget is “cash.” My husband and I each get $25 a month to spend on random items that we don’t use the credit card for and that we don’t enter into the budget specifically. I think this can be very freeing for a lot of people. I use these dollars for a Starbucks run, an unfortunate library fine, etc. There are some months when I don’t spend all of the money and if it accumulates, I can buy some fun, like new shoes, and it doesn’t have to come out of our clothing category.

My brother worked for a company that provides an internet-based budget program, mvelopes.com. I never would have paid for it because I am too cheap, but after having a free membership through him, I can’t live without it and happily pay $45 quarterly now that my brother has moved on to another job. Between my husband and I, we get 7 paychecks during the month. This allows us to set up an automatic system that allocates each check to the categories we set up, like the envelope budgeting system, but electronically. It also automatically downloads transactions from our bank accounts daily (can even download from credit cards if you use them, which we do not.) I used to spend an hour or more every week entering things into quicken and cross checking with our bank acct. Now I spent just a few minutes every day dragging the bank’s downloaded transactions to their proper envelope and I am done. I love it. Since it is internet based, you can check your balances from your phone or my husband can at work, etc. It takes some initial time to set up and occasional tweaking, but basically once you get it set up can run on autopilot. It is the only time we have been able to stick with a budget system. You have to assign every cent that comes in and I like how you have to consciously decide how to spend every bit of money.

Yay Mvelopes!
I too cannot live without my Mvelopes online budget system. I tried using an excel spreadsheet and that was good and all, but I really suck at math and just never checked back with the budget during the month after I created it. This created lots of problems as you can imagine! We also tried the old fashioned envelope system that our finance guy suggested (complete with mini accordian file to tote around), but I found that SO many of our expenses came out automatically, or were paid online, that it was a giant headache every payday to figure out what needed to come home in cash, what needed to stay in the account, what denominations hubby needed to get from the teller…blah!!
Mvelopes solved all that. We’re coming up on 3 years of using the programs, and beyond a few bugs and a learning curve, I recommend it to everyone I speak to about budgeting. Love it! Good topic!!
(see http://www.crown.org or http://www.mvelopes.com if you want to check it out)

Oh my! Have you been sitting at my dining room table?
My husband and I just started zero based budgeting for our family. We call it The Snowball Project (you can read why we call it that if you go here: http://jumpingtandem-ne.blogspot.com/2009/01/snowball.html). We’ve done this before, and it always works, but we’ve never done it together. He was in charge of our budget while I whined and complained about all of the envelopes. And then I was in charge of the budget while he wondered where all the money went. This time we’re in it together, for better or worse, richer or poorer, sickness and health, and all those envelopes! Thanks for this post. It confirms that we’re on the right track!

I totally do this so I’m excited that I’m actually doing the right thing! I use a Google Doc as well so I can access my budget and tracking from wherever I am whether or not I’m traveling, on vacation, at work or home. Then I have a weekly calendar reminder that tells me to update my budget to see where I’m at. Definitely helps, thanks!

we’ve essentially been budgeting this way for just about 2 years now. it radically changed the way we look at our money, and i can’t say enough good things about it. having a budget, ANY budget, is a good thing… but the more detailed you can be, the better picture you will have of where it all goes.

We really have benefitted from budgeting over the past two 1/2 years since we got married. When we started out, my husband earned $40,000, had $18,000 in school loans, and I earned an extra $16000 that year with my part-time income. Now, we (including a 16 month old) live on his income, have no debt, and are 4 months away from having a 6 month emergency fund in place. Amazingly, we could even handle a 10% salary cut because we are living below our means and saving about that much a month by shopping grocery sales, finding money saving deals, etc.

We’re just now totally moving over to a cash-only budget, except for major items like utilities, rent, and tithe. The cash only system does really help us keep track of where our money’s going. We also budget $40-50 for each of us each month for spending money on little things we want.

We’re currently implementing a budget for the first time (totally inspired by the first run of this post). We’re still working out the kinks, but it’s definitely freeing. I recently became a SAHM, so have plenty of anxiety around my newly-absent income. Putting our income & expenses on paper is a relief – because I can see, in black & white, that we really do have enough.
I still can’t convince myself to “spend” every penny of income in the budget. I don’t trust myself to budget expenses accurately, so I’ve left a nice “cushion”. Perhaps I’ll have more confidence in our budgeted amounts after doing this a few months?

We’re doing Dave Ramsey’s Financial Peace University right now and he’s a huge advocate of zero-based budgeting. We’re in our first month of a zero-based budget and I love it! I feel so much less stressed about money this month, knowing where every dollar is supposed to go beforehand. I highly recommend it to everyone!

Great post! We also do zero-based budgeting. We learned it from (who else?) Dave Ramsey, whose stuff we LOVE! We are currently using the software program You Need A Budget, which uses zero-based budgeting (giving every dollar a job), as well as living off of your last month’s income, instead of the current one. This system is fabulous and completely works for us!

I agree with the plan of zero-based budgeting. However, it’s even smarter when you take it a step further and toss in thrift store shopping. This lowers line-item costs and puts more money to use for college savings or mortgage payments.

Once you are familiar with the thrift store inventory, a new sense of spending comes into play. I have a $5 price gauge. I can buy a quality sweater, dress or pair of shoes with that. For example, I went to my favorite luxury store, Anthropolgie, to buy my one simple luxury, quality scented candles. I buy them on sale. The woman in front of me bought a pair of jeans and what looked like a white poplin blouse for $278. Later that day, at the thrift store I found a like new if not new Anthropologie sweater for $3.99, which I will treasure and share with my daughters.

I do zero-based budgeting and it works really well. I made up an Excel spreadsheet myself so that I can keep track of how much cash is in each category. For eg. I put aside $150 a fortnight for utility bills but because they come in staggered I need to keep track of the balance of this column. Budgeting for EVERYTHING is a sure way to make sure you don’t have any nasty surprises. I do however have a miscellaneous fund that I put $100 a fortnight into which comes in handy for extra medical and school expenses and parties that the kids get invited to. It’s so hard to save these days though, I know I should allocate part of my budget to saving and put it out of reach but I find it really hard to find any spare cash lately. What are some ways people cut back to get more into savings?

Nate and I just started a zero-based budget without knowing what on earth it was. He found a great app for the iphone that allows you to put it on all phones used by your family and it has a server that you can use to synchronize all the info, so anytime you got out, you can immediately add it in the proper category – which is the only way either of us will actually keep a budget. It’s called Family Budget from etreasure.com if you’re interested.

We’ve been doing this ever since we got married 13+ years ago. I just didn’t know it had a name back then! To echo an earlier commenter, we have about $20 per month in cash for each of us to use however we want. Like another commenter, I used to have trouble with expenses at WalMart and Target, too. I have found that by doing my grocery shopping at a local grocery store I save money even though the prices are sometimes a little higher than the big box stores. Why? I’m not tempted to pick up extra items like clothing, home decor, or anything from that wonderful, but tempting dollar aisle. Yes – I still shop at the big box stores – just not for groceries – and only with a list. Unless I’m using my monthly cash.

Like a previous poster, I use Mint(.com) It is so nice to have everything right there on one website. And it even tells me if I go over budget. I have to reclassify some of my purchases, but it is pretty smart usually. We buy everything with credit/debit cards (pay it off completely each month) to help keep track of where it all goes. Plus, we get a sweet cash back rebate every few months.

This sounds pretty much like what I’ve been doing for about the past 20 years. I could not survive without my budget! I’m not sure it is truly a zero based budget, some categories (like medical expenses and car repairs) are more predictive…I budget money for them so that if something unexpected happens the money is there, but it is entirely a prediction. Still, every dollar is accounted for. I keep my budget in an Excel spreadsheet.

I believe that it is our attention to our budget that has let us do well on a relatively small income.

We’ve started doing the month-to-month budgeting thing recently. Mainly out of necessity since my freelance work is so unpredictable. I always know by the 25th of each month what my paycheck will be for the following month. We’ve had a budget for a while and while I am NOT a numbers person, we keep it pretty simple (using Excel) and it has served us well. I also do a daily expenses tracking sheet. At the end of each week, I enter in our daily spending and it shows me where we are for the month. That way I know what I have to spend for the rest of the month (ie, ramen noodles vs. filet mignon). Budgeting is kind of like dieting–calories in=calories out. But like dieting, it’s really easy to get off track. However, a few extra lbs is a lot easier to swallow than a few thousand $ in debt!

We use Mint.com to budget, and this is a HUGE help.
We’d tried budgeting on our own a number of times but always fell off the wagon after a couple of months.
We try to make it a zero-based budget, but sometimes its tricky since I am not a salaried employee and my income varies from paycheck to paycheck.
But, we have done our best to be conservative in what we budget for items like groceries and household items and if there is money left over at the end of the month, it is just a bonus toward paying off our debts.
We are trying really hard to minimize our debt right now, so it keeps us pretty frugal with a couple of splurges here and there for special occasions.
We do, however, have a miscellaneous category, because there are things each month that I just don’t know where else to put, and tracking the minutiae would drive me bonkers.

There’s a program called You Need a Budget (www.youneedabudget.com) that goes one step further. You budget for the month based on the previous month’s income. That way you’re always a month ahead. You’re not living month to month, even if you are within a month’s budget. Check it out. I love it!

“…that’s just writing down on paper what they wish they could spend money on”

This is so us! Everytime we try to look at the buget, we just look at where we we’ve been spending and then lament that we need to spend less. We use Quicken to track everything in tons of categories (two engineers in our house!), and yet it never occured to me to start with the income and then create a budget based on our priorities… I’m inspired to look at our finances in a whole new way. THANKS!

That is a great tip. Ever since the recession hit us in November, we have been watching our money closely. Neither of us are budgeters but we are now forced into watching where every penny goes and where we can cut back.

Check out Tsh’s recent post How I Budget, and take a look at the “Irregular” section of the post. She talks about how to prepare for those surprise expenses.

There’s no way a budget can prepare for every contingency, but you can set aside money towards specific goals to cover some of the more predictable ones, and you can put some money towards a general “emergency” fund for things that totally come out of left field.

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I'm Tsh—a vagabond homebody who's lived & traveled all over with my clan of 5. Together with friends, we chat about what it means to live well. Read on...